With the US elections around the corner and the debates in full swing, what will the impact be on financial markets? Join us as we go through the various possibilities of what might happen when either Donald Trump or Joe Biden gets elected.
According to data by FiveThirtyEight, the markets are pricing in a higher likelihood of Joe Biden winning the upcoming elections. While we cannot predict with certainty who will emerge as the next US president, we can examine the impact each candidate’s proposed policies will have on the financial markets. And, aside from the huge volatility that investors are expecting – as reflected through the significant premium level of VIX futures contracts maturing in October and November – the US elections could have a huge impact on specific currencies as well.
Financial market impact of a Biden presidency
A Biden presidency would translate to more fiscal support as he has proposed some $5.4 trillion in new spending over the next 10 years, according to the Penn Wharton Budget Model, which could boost the US stock markets and weigh on the safe-haven US Dollar.
According to data from Eurostat, EU exports to the US in 2019 were worth around 384 billion euros, whereas US imports to the EU were worth around 232 billion euros. The EU had a 153 billion euro ($180.3 billion) surplus with the US which shows that Europe exports a lot more to the US as compared to its imports. Hence, with Biden's commitment to avoid an expansion of government debt, despite the introduction of such a large fiscal stimulus package, it could pave the way for major tax hikes and spending cuts in the U.S, which may curtail US economic growth and result in negative spillover effects to Europe’s export-oriented economy.
Elsewhere, the sterling could also benefit from a Democratic blue wave as Biden’s administration indicated plans to partially undo the tariffs imposed by Trump on EU goods, along with other agreements such as $10bn worth of two-way trade on steel and aluminum.
Lastly, raising taxes for people who are earning more than $400k a year could result in a capital flight to other safe haven currencies, such as the JPY and CHF which are also seen as safe haven currencies.
Financial market impact of a Trump presidency
If re-elected, there are fears that Trump may start a trade war with Europe, opening the door for further tariffs over the course of his term, which could threaten relationships with historical allies and put a dampener on US international trade, which in turn benefits more domestically-focused stocks at the expense of global manufacturers. This could translate to an appreciation in the greenback, at the expense of the currencies such as JPY and NZD which rely on their export-oriented economies. Meanwhile, currencies like EUR and CAD could struggle with rising trade tension, potentially more tariffs and less bilateral trade.
Elsewhere, we could expect trade relations between US and China to worsen as Trump has explicitly outlined policies to “bring back 1M manufacturing jobs from China”, provide tax credits for companies that bring back manufacturing to the US, and prohibit federal contracts for companies that outsource work to China, which could hurt the market risk sentiment as well, causing high beta currencies such as AUD and NZD to depreciate.
This brings us to the conclusion of our first article. Do revisit the market analysis blog segment as there will be frequent updates and newly published articles, which explores the various possible trends in relation to specific trading instruments.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support